Quick Facts

Japan’s economic freedom score is 72.3, making its economy the 30th freest in the 2018 Index. Its overall score has increased by 2.7 points, with dramatic deficit reduction improving the score for fiscal health and far outpacing a decline in government integrity. Japan is ranked 8th among 43 countries in the Asia–Pacific region, and its overall score is above the regional and world averages.

The newly reelected government’s two-thirds parliamentary “super majority” will translate into a fresh mandate to double down on its “Abenomics” revitalization agenda aimed at reinflating the economy: monetary easing, “flexible” fiscal policy, and structural reform. Trade liberalization is also a goal. The government is keen to revive the Trans-Pacific Partnership following the U.S. withdrawal, but that is unlikely to occur soon. Japan has one of the world’s heaviest government debt burdens. Political stability and a well-maintained rule of law strengthen its economic freedom.

Background

A longtime global economic power and Western ally, Japan has a history of revolving-door leadership. Prime Minister Shinzo Abe, in office since 2012, was elected to a historic third term in October 2017, benefitting from chaos among the opposition that overshadowed the negative polling of his scandal-plagued government. The public wants deeper reforms to remedy Japan’s endemic economic problems but fears the upheaval that such measures would cause. The government’s “Abenomics” policy has made a dent in deflation, but demographic decline caused by a low birthrate and an aging, shrinking population poses a major long-term economic challenge. Security concerns include North Korea’s bullying behavior and China’s claims of sovereignty in the East and South China Seas.

Secured interests in real property are recognized and enforced, but the property registration process can be burdensome. Japan’s judiciary is independent and fair. Outright bribery of government officials is extremely rare, but an inwardly cooperative web of close relationships among companies, politicians, government agencies, and other groups fosters a climate that is conducive to corruption.

The top personal income tax rate is 40.8 percent. The top corporate rate is 23.9 percent, which local taxes and an enterprise tax can increase significantly. The overall tax burden equals 32.0 percent of total domestic income. Over the past three years, government spending has amounted to 39.1 percent of total output (GDP), and budget deficits have averaged 4.4 percent of GDP. Public debt is equivalent to 239.2 percent of GDP.

Japan is losing ground in ease of doing business to other countries with more robust reform agendas. Businesses must deal with inflexible labor laws and a highly regimented recruitment system that can significantly increase the cost of managing personnel. In 2017, despite political resistance, the government continued its efforts at structural reform to scale back institutionalized farm subsidies and liberalize the electricity sector.

Trade is moderately important to Japan’s economy; the combined value of exports and imports equals 36 percent of GDP. The average applied tariff rate is 1.4 percent. Nontariff barriers impede trade. Government openness to foreign investment is above average. Banking is competitive, but growth is not dynamic. Japan Post, the holding company for the post office, postal bank, and postal-insurance company, has distorted the financial sector.